Companies pulling back from renting space in San Francisco

An article in this morning's San Francisco Chronicle Business Section "Companies pulling back from renting space in San Francisco" citing different major brokerage houses stating that for the first three months of 2008 the office vacancy increased with between 4.000 and 400,000 square feet of office space coming back on the market. They also referenced over 1.5 million square feet of new office construction currently underway. I immediately called our San Francisco Colliers office to find out what is really happening, and to my surprise they reported a positive absorption of 185,000 square feet! Q1 2008 - The Knowledge Report Turns out each brokerage house defines what is leased and what is vacant in a slightly different way which then results in different conclusions...so too soon to tell if the San Francisco office market tide is turning. But...same paper, JP Morgan Chase CEO stated "The recession just started...we don't know if it's going to be mild or severe...we're thinking there's a third of a chance that it's going to be pretty bad...closer to the 1982 recession than the very mild recessions we had in 2001 and 1990." So stay tuned to this bat-channel for future updates!

Recession

April CFO Magazine "It's going to be a very bad recession, perhaps the worst I've seen in the 46 years I've been working," Jerry York said at the annual CFO conference. Another article in our local newspaper case studied a residential buyer who thought he had bought a bargain 6 months ago only to watch it go down 20% since then. My staff gives me a bad time every time I write a "doom & gloom" but I tell it like I see it and when we start to recover you may read it in this blog before the press picks up the change in direction.

Major Radio Talk Show Host Attempts to Paint a Rosy Picture of our Current Economic Situation

Two days ago I was listening to a major radio talk show host attempt to paint a rosy picture of our current economic situation. He stated, almost as if it were a fact, how segments of corporate America were experiencing growth and profitability, how the housing market for sure was finally at bottom and could only begin to recover, and his last statement that totally invalidated anything else he had been saying. And oil prices have absolutely peaked at $120 a barrel and should be headed down! Wrong, wrong, and wrong again. Of course just one day later oil prices set a new record high, and the San Francisco Chronicle headlines blared, “Housing picture worse as prices plunge lower!” So much for national talk show predictions!

Signs of the Times

Signs of the times but lately I've noticed a number of landlords advertising in major business publications box ads "pleased to announce the following transactions" with most of the "announcements" renewals in the 2,000 to 3,000 square foot range. A year ago these sizes would have had at least another zero and would be 20,000 sf or larger ...

Today's Big Headlines - Foreclosures Soar 300%

Today's big headlines. Foreclosures soar 300% in California and Bay Area ... at what point will residential home values hit bottom, when is the best time to buy, and when will we get out of this economic trough? It struck me reading this article that with land an increasing scarcity (Will Rogers said it best years ago "Buy land ... they don't make it anymore") and raw material costs skyrocketing at some point these houses selling at bargain prices will be a true investment home run play ... there are probably funds out there poised to scoop up hundreds or thousands of foreclosed homes at the right "bottom" price, then either repackage with financing or hold and put back on the market in a few years when values have recovered ... back in the 1980's we had this happen with office buildings, where they were mothballed, sealed up, and inventoried until rents and demand made it worthwhile to get them back into operation ... just think, with the cost of fuel going no where but up and resources going nowhere but down at some point someone is going to make a ton of $.

Downtown Office Buildings

I haven't seen this since the savings and loan meltdown in the early 1990's when about 35% of our regional Class A office buildings ended up in foreclosure. Younger office brokers look at me in disbelief when I describe Class A downtown office buildings going for $67/sf and fully-leased Class B, with 90% lender financing, selling for $45/sf as the highest bidder. This time around we won't see anything even close to that past experience but in today's USA Today April 29 there is a large advertisement for an Absolute Auction, no reserve, no minimum, for a 117,000 sf office condominium building in Orlando Florida ... so expect more of these as financial restrictions on commercial loans make it difficult to fund commercial property that might be worth less than the current debt, with no recovery in sight ...

The Society of Office and Industrial Realtors

I have been in Washington DC for the past week attending the annual SIOR conference. This organization, The Society of Office and Industrial Realtors, is one of the oldest subgroups of the National Association of Realtors and is made up of the top 2% nationally of office and industrial commercial brokers. The group had its start when America entered WW ll and needed to know right away where in the US there were industrial buildings that could be transformed into tank, rifle, ammunition manufacturing and where port facilities could be converted to military shipbuilding.

In conversations with office brokers from around the US the general consensus was we are in a slowdown (Salt Lake City was the exception) and this will get worse over the next 18-24 months. Space will take increasingly longer to fill, and while rental rates may not drop in the short-term, upfront landlord concessions like free rent will become more prevalent.

Courses and lectures I attended included a session on how the US is currently in the process of being overtaken by China and India in terms of financial leadership and innovation, and that in the future many of the 'iPod' inventions will be done outside the US. Another class dealt with how brokers deal with Tenant bankruptcies and how to be of assistance in corporate reorganizations.